Intro

All numbers in this problem are in thousands of dollars.

Jim Jones currently has income in period 0 of 40 and in period 1 of 44.

Given the interest rate at which Jim can borrow or lend, he initially plans to consume 42 in period 0 and 41.8 in period 1.

Jims sister Jennie offers him a real investment opportunity that requires him to invest 18 in period 0. If he makes the investment, and by borrowing at the same interest rate that he faced originally, he could consume up to a maximum (assuming there is no minimum desired consumption in either period) of 92 in period 0.

[Hint: Draw a picture of Jim's initial situation. Add the budget constraint he would face if he accepts Jennie's offer and makes the investment.]

Part 1

From the information given, it follows that the interest rate at which Jim can borrow or lend is (to the nearest %)

Submit

Part 2

From the information given, it follows that the NPV of the real investment opportunity that Jennie is offering to Jim is (in thousands of dollars):

Part 3

Based on the interest rate from part 1, the NPV from part 2 and the fact that the investment cost is 18 in period 0, what must the investment yield in period 1?

Part 4

If Jim accepts the real investment opportunity offered by Jennie, what is his maximum consumption in period 1?

Part 5

In the initial situation, Jim had incomes (y₀, y₁) = (40, 44). If Jim accepts the real investment opportunity offered by Jennie, what would his post-investment income be in period 1?

Part 6

If Jim accepts the real investment opportunity offered by Jennie and decides to consume $51 thousand in the current period, how much will he have to borrow from the financial markets?